Business

OPINION: SA's economy is now waiting for some positive news

JOHANNESBURG - With economic growth now likely at 0.6percent year-on-year (y/y) for 2018, and choppy financial markets, with a highly volatile domestic currency, South Africa’s economy needs some positive news going into 2019.

With the Brent crude oil price dropping to $50.47 (R704.09) a barrel just before Christmas on prevailing demand side fears (reaching R731a barrel), South Africa’s Central Energy Fund delivered a R1.23 a litre cut in the petrol price in January 2018.

This is significant from both an inflation and interest are point of view. Indeed, South Africa has seen petrol prices fall sharply since October 2018, with lower inflation now likely in December 2018, of closer to 4.4percent y/y, and in January 2019 of around 4percent y/y, down from the 5.2percent y/y that was recently published for November 2018.

This will lower the consumer price index (CPI) inflation outcome for 2019, but the base effect will likely boost inflation in 2020, as will likely larger electricity tariff increases than in recent years, raising it to potentially average 5.6percent y/y - with 2020 now the year that the Monetary Policy Committee will be targeting in 2019 re inflation.

The SA Reserve Bank targets inflation chiefly 12 to 18 months out, but also looks six to 24 months out. With CPI inflation likely to be closer to 5.7percent in 2020, an interest rate increase in the second half of 2019 (of 25 basis points) is possible for South Africa. However, much will depend on the US interest rate hike trajectory in 2019.

Petrol price cuts tend to ease living costs. However, rand weakness remains a threat. Both the rand and the oil price are likely to remain volatile in 2019.

This year, the rand opened at R14.35/$, R16.46/e and R18.31/£, after losing more than a rand in choppy trade in December 2018 against these crosses on rising risk aversion. This risk-off persisted briefly into 2019, weakening the domestic currency to R14.69/$, R16.65/e starved of investment inflows and foreign currency and R18.40/£.

Financial markets have been fretting for a while about both a sharp economic slowdown, if not recession, in the US, along with fears of a global financial crisis.

The chance of the US pausing in its interest rate hike cycle this year, potentially delivering less hikes than signalled in December 2018, has increased slightly on a weakening in US economic growth. Such an outcome, which markets are currently factoring in as increasingly likely, would serve to support the domestic currency, likely driving it stronger against the US dollar, also assisting SA on the inflation and interest rate front. Economic growth in South Africa is likely around 1.7percent y/y in 2019, a year where the country aces a National Election, probable amplified political noise and uncertainty in the run up to this (which if it is extreme will dent the economy’s growth prospects).